World economy cheers up

As headwinds from the global financial crisis subside, policy makers must focus on tackling issues that hinder sustainable development

By Author  |  United Nations  |  Published: 17th Dec 2017  12:00 amUpdated: 17th Dec 2017  3:07 pm

The global economy is seeing an upturn with it growing by 3% this year, the highest growth since 2011. This is also a significant acceleration compared with the growth of just 2.4% in 2016. The improvement is widespread, with roughly two-thirds of countries worldwide experiencing stronger growth in 2017 than in 2016.

The World Economic Situation and Prospects, the United Nations’ flagship annual publication on trends in the world economy, released on December 11, 2017, also forecasts that global growth is expected to remain steady at 3% in 2018 and 2019 as well.

The recent pick-up in global growth, the report states, stems predominantly from firmer growth in several developed economies, but East and South Asia remain the world’s most dynamic regions. In 2017, East and South Asia accounted for nearly half the growth, with China contributing about one-third.

The end of recessions in Argentina, Brazil, Nigeria and Russian Federation also contributed to the rise of global growth. Labour market indicators continue to improve in a broad spectrum of countries and world industrial production has accelerated. A rebound in world trade that has been predominantly driven by stronger demand in East Asia and an improvement in investment conditions supported the upturn.

This is no small achievement since the last decade was punctuated by a series of broad-based economic crises and negative shocks, starting with the global financial crisis of 2008-09, followed by European Sovereign debt crisis of 2010-12 and the global commodity price realignments of 2014-16.

Investment and Productivity

At the global level, investment is no longer acting as a drag on growth, and in fact, accounted for roughly 60% of the acceleration in global economic activity in 2017. However, the recent revival in investment is on a very low starting point and remains confined to a narrow set of countries.

In developed economies, private non-residential investment showed more resilience in the first half of 2017. In Japan, a surge in investment was spurred by a strong rebound in credit growth supported by monetary policy measures. Adjustment in mining-related sectors continued to restrain investment in Australia and Canada.

In the US, following two years of steep cutbacks, investment in mining exploration, shafts and wells rebounded in the first half of 2017 and the heightened uncertainty about the relationship between UK and EU has deterred investment in the UK. While in East Asia investment has remained relatively strong, in South Asia it has been restrained by fragilities in India’s banking sector.

International Trade

World trade rebounded in 2017 expanding at an estimated pace of 3.7%. This a huge plus over 2.2% of 2016. This recovery was also accompanied by a pickup in world industrial output, demand for international air freight and container shipping.

In the first eight months of 2017, emerging Asia contributed 60% to growth in global merchandise imports. This was triggered by stronger domestic demand and supported by policy measures in many economies, including China.

In several major developed economies, including the EU, Japan and the US, imports of capital goods rebounded during the first half of 2017 as firms responded to improving conditions for investment. In the emerging Asia region, exports were buoyed by upturn in trade in electrical and electronic products, reflecting the region’s close integration with global value chains.

However, recent course adjustments in major trade relationships such as the US’ decision to renegotiate the North American Free Trade Agreement and reassess the terms of its other existing trade agreements have raised concerns.

Commodity Prices

In late 2014-15, most commodity prices dropped sharply from the high levels reached in the boom period of 2011-13. Most sectors showed an upward trend during 2016. However, since early 2017, these cross-asset price linkages have played a smaller role and price dynamics have been driven primarily by sector-specific developments rather than a common trend.

The oil market is in the process of rebalancing as demand growth surpasses supply growth. The market is likely to rebalance by the first quarter of 2018, eroding the excess of crude oil inventory built up since 2014. Strong demand for oil is expected from China, India and the US – the world’s three largest energy consumers.

Inclusiveness in Growth

Labour market indicators in developed economies, economies in transition and developing economies continue to exhibit improvements with unemployment rates falling since 2010. Exceptions include Greece, Italy, Spain and South Africa.

According to ILO estimates, there are around 200 million unemployed in 2017. While global unemployment rate is expected to remain stable in 2018, as labour expands in line with demographic developments and participation, the level of unemployment may rise further.

Women are likely to be more unemployed than men. Youth are around three times as likely as adults to be unemployed. Moreover, more than one-third of the working population in low-income countries is living in poverty and more than 40% of the world’s workers are in vulnerable forms of employment with little or no access to social protection, low and volatile income and high levels of job insecurity. South Asia and sub-Saharan Africa have the most vulnerable employment.

Spots of Bother

While the overall growth prospects of the global economy have improved, forecasts for a few regions, including for some of the world’s poorest countries have been revised downward. Many of these countries have suffered setbacks in progress towards the Sustainable Development Goals (SDGs) as GDP per capita declined in four major developing regions — West Africa, Central Africa, Southern Africa and Latin America and the Caribbean — last year.

Further, setbacks are anticipated in these regions as well as Western Asia in 2018-19. These regions combined are home to nearly 20% of the global population and more than one-third of those living in extreme poverty.

At least 750 million people live below extreme poverty in 2017, with almost no change from last year. The Food and Agricultural Organisation of the UN estimates that 815 million people were undernourished in 2016, compared with 777 million in 2015.

Supporting 750 million people rise above the extreme poverty line of $1.90 per day would cost around 0.7% of the global GDP – which is an achievable goal, but it does push the targets of eradicating poverty and creating decent jobs for all further from reach and poses risks to many other SDGs.

After having remained flat between 2013 and 2016, the level of global carbon dioxide from fossil fuel combustion and cement production increased in 2017. This suggests that return to stronger economic growth may also result in rising emission levels, thereby underscoring the need to address longer-term structural issues.

Moving Forward

Despite the improved outlook, the global economy continues to face risks – including changes in trade policy, deterioration in global financial conditions and rising geopolitical tensions. While these uncertainties remain, what stands out in the current economic environment is the alignment of the economic cycle among major economies, stability in financial market conditions and the absence of negative shocks.

As conditions for more widespread global economic stability solidify, the need to focus policy actions on economic crisis consequences and short-term macroeconomic stabilisation has eased. Coupled with improving investment conditions, this creates greater scope to reorient policy towards longer term issues, such as strengthening the environmental quality of economic growth, making it more inclusive and tackling institutional deficiencies that hinder development.

(Source: United Nations)